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Judgment calls

Rob Day: April 21, 2009, 4:10 PM
My last post seems to have set off some alarm bells for the various market analysts putting out cleantech venture capital tallies, since I heard from most of them today at some point...  For the record, my intent wasn't to question anyone's methodologies, much less competence! But you can understand why these professionals take these things seriously, since their job is to be as accurate as possible.  Unfortunately, there was like an 6x delta between the high and low reported totals this past quarter, so it's tough not to want to ask tough questions. To the strong credit of guys like Eric Wesoff (GTM), Brian Fan (Cleantech Group) and Adam Wade (Dow Jones), they welcomed my questions today and gave me a lot of good info that helps illustrate just how many judgment calls there are in all these tallies. Let me provide a few non-hypothetical examples from the first quarter.  Readers:  Would you include these deals in the Q1 tally if you were in charge? 1.  Optisolar raises a $30mm round of senior secured promissory notes, as reported on March 18th by PE Hub based upon regulatory filings.  These notes may or may not be intended to convert into equity in any subsequent financing event. Would you count it in a Q1 cleantech venture tally? 2.  SunEdison announces on March 4th that they have raised $20mm in "project financing" from Union Bank (note: link opens pdf). Would you count it in a Q1 cleantech venture tally? 3.  News comes out on March 6th that eSolar has raised $30mm from India's Acme Group in exchange for 5% ownership of eSolar, as part of a deal that also included regional licensing of eSolar's technology. Would you count it in a Q1 cleantech venture tally? 4.  On Feb. 10th, PE Week Wire reports that SolFocus has raised an additional $19.28mm in Series C financing.  Interviews with the investors and/or company (yes, these analysts do indeed do a fair amount of legwork to bring you these tallies) indicate that the financing occured in the last part of 2008 as part of a larger round, but no one has reported it previously. Would you count it in a Q1 cleantech venture tally? There are no wrong or right answers to any of the above.  All are good tallies, they're just different.  Just so you know:
  • Optisolar was included in the GTM tally, but not the Cleantech Group or VentureSource tally.
  • SunEdison was included in the VentureSource tally, but not the GTM or Cleantech Group tallies.
  • eSolar was included in the VentureSource and GTM tallies, but not the Cleantech Group tally.
  • SolFocus was included (@$47.5mm) in the GTM survey, as well as (@$66.8mm) in the Cleantech Group survey, but not in the VentureSource tally.
But I'd be hard-pressed to argue that any of the above judgments were demonstrably correct or incorrect. And that's just the solar category, dealing only with U.S.-based companies.  You can get a sense as to how the variances between the different surveys come up, especially once you include questions about whether a cleantech IT deal should be cleantech or IT, not to mention geographic scope issues. Today, VentureSource also released their cleantech-specific tally (the one I cited yesterday didn't draw cleantech investments across categories, so I had only mentioned their renewable energy numbers), and it helps draw the tallies yet closer.  VentureSource counted approximately $300mm in U.S. cleantech venture investments in Q1, which is still down from the $1B they counted in Q4. Meanwhile, the Cleantech Group counted about $700mm (I'm eyeballing this from a chart) in North American investments.  That's still a big difference between VentureSource and Cleantech Group totals (just to pick two for illustration purposes), but not such a wide divergence as we originally thought.  And then we go back to the potential methodological differences I mentioned in the last post. I've mentioned several times before that, due to methodological differences, the most useful exercise is NOT to compare across surveys, but to compare time series within any given survey.  So:
  • GTM's totals dropped from $1.7B in Q4 to approx. $1B in Q1.  Deal count dropped from 99 to 59.
  • Cleantech Group's totals dropped from a little over $2.5B in Q4 to a smidge over $1B in Q1.  Deal count dropped from 99 to 82.
  • VentureSource's totals dropped from $1B in Q4 to $0.3B in Q1.  Deal count dropped from 44 to 25.
  • Moneytree's totals dropped from $974mm in Q4 to $154mm in Q1, but deals dropped from 67 to 33.
Forget all the differences across the different surveys, what's clear is that there was a significant drop-off from Q4 to Q1, both in terms of deals and dollars.  Deals dropped probably by about a third to half.  Dollars dropped more, by 60% or more. That's not that different from the ~50% declines across ALL venture capital categories that VentureSource and Moneytree saw.  Especially once you account for the fact that the mega-deals completely disappeared, thus pulling down dollar totals more than deal totals. In another post we'll talk about why the pull-back happened and what it might mean.  For now, it's back to my (supposed) vacation... . . .

Q1 cleantech venture numbers:  What happened??

Rob Day: April 20, 2009, 5:00 PM
So just a couple of weeks ago, I posted an analysis of the differences between the Cleantech Group's and GTM's Q1 venture capital tallies, concluding that cleantech remained a bright spot within the overall venture landscape. And then over the weekend came releases of the Moneytree (pdf) and VentureSource tallies showing a massive drop-off from Q4.  Not a bright spot at all.  Moneytree showed an 84% drop in cleantech venture dollars from Q4 to Q1, and VentureSource saw a 73% decline in renewable energy financing from 1Q08 to 1Q09.  Versus the approximate $1B tallied by both Cleantech Group and GTM, Moneytree counted only $154mm in cleantech deals, and VentureSource counted $117mm going into renewable energy (which they describe as the "backbone of the industry-spanning 'cleantech' category"). So what happened??  Is it time to hit the panic button?  Even in the context of overall declines across all venture categories, this would seem to be disheartening news. Without having the dealflow details available, it's tough to tell exactly what happened.  But we can tease out some clues. First of all, both the Cleantech Group and GTM numbers were multinational.  Is it possible that most of the deals in Q1 were outside of the U.S.?  Well, there may be something to that at some level.  But given that in the Cleantech Group's press release they cite three U.S.-based solar deals (SolFocus @ $67mm, Solar Power Partners @ $47mm, and Sierra Solar Power @ $40mm) that alone added up to more than the VentureSource renewable energy totals, something's still very off. What about deal counts?  Again, tough to come up with good comparable numbers across all the studies, but in North America the Cleantech Group counted 45 deals.  But Moneytree counted only 33 cleantech deals in the U.S., and VentureSource counted a meager 9 renewable energy deals.  A pretty big divergence.  I can only come up with 4 possible answers for this: a) Missed deals in some surveys b) Methodological differences in industry categories, where some surveys have broader definitions of "cleantech" than others -- and where the renewable energy deals in particular fell off, as opposed to energy efficiency, water, or materials c) Methodological differences in inclusion of stage and type of financing.  This may very well be a major factor, if some surveys aren't including convertible notes in their tallies and others are.  Because some of the biggest deals that were announced often conflated debt and equity financings, it would certainly inflate some of the dollar amounts if the debt was also included.  And as these are often bridge financings intended to convert into a future equity round, it's unclear that they shouldn't be included anyway. d) Methodological differences in terms of what quarter a deal is included in.  We discussed that in the post a couple of weeks ago. There may be other possible explanations as well, readers are encouraged to submit their own ideas. While the Moneytree data showed a dollar drop of 84% from Q4 to Q1, the number of deals fell only about 50% in their survey.  That, for me, really summarizes what all the various surveys showed in common:  A drop in the number of deals, but an especially huge drop-off in the number of mega-deals, so that the dollar totals were way way down. . . .

What’s the right energy price benchmark?

Rob Day: April 13, 2009, 3:24 PM
Everyone pays attention to oil prices as their first cut on energy prices.  I see numerous Wall St. analysts comparing oil price changes to solar stock price changes and showing strong correlations, and I scratch my head.  Oil prices shouldn't really drive the fortunes of solar companies.  Very little of our electricity generation mix in the U.S. or in Europe or Japan (or other solar markets) comes from oil-fired generators.  And yet investors seem to view solar as a hedge on oil prices, probably because oil prices are highly visible and volatile.  We pass by gas stations all the time in our daily lives and see the prices go up and down.  Oil prices are reported on in the evening news.  VCs are often asked what their oil price "breakeven" is when looking at cleantech opportunities (ie: "what long run oil price do you invest based upon?").  Oil, oil, oil. But I would argue that the more salient price is natural gas.  It's the peak generation fuel of choice and thus determines the peak electricity prices that most affect energy efficiency and smart grid and PHEV techs.  Ditto for solar prices, since solar is largely a peak power play (esp. once peak-shifting energy storage options are implemented).  It's also a minor transportation fuel, so in some scenarios it can affect transportation tech options as well (if natgas prices drop, we'll see a lot more natgas cars on the road).  Coal prices would be another good price to follow, but since it looks harder and harder to build new coal-fired facilities in the developed world, natgas fired generation is just as important for long-run scenario planning. Funnily enough, right now there are a lot of divergent viewpoints when it comes to future natural gas prices for the U.S.  Here's one analyst who argues that peak U.S. natural gas will occur between 2010 and 2020.  Yet I've also seen industry participants such as Ziff Energy point to the rapid expansion of "non-traditional" reservoirs in the U.S. such as the Barnett Shale and argue that natural gas prices are going to go on a long-term decline (more good info from FERC in this pdf), although others say that such reservoirs will be costlier to access.  Forward price curves, according to FERC and NYMEX (note: link opens pdf) are up, but not significantly.  (Coal futures also creep up a bit but stay relatively the same, btw -- pdf at this link) So basically, no one has a sure idea of what natural gas prices are likely to do over the next decade.  But with natural gas expected (by the EIA at least -- note, link opens yet another pdf) to dominate new generation capacity additions between now and 2030, it's a critical question for those investing in renewable energy markets.  Certainly a question I worry about more than the vagaries of daily oil prices. . . .

What’s next after “cleantech” and “greentech”?

Rob Day: April 7, 2009, 3:10 PM
I've been having quite a few conversations with investors at generalist VC shops lately, where they've taken pains to point out that they don't use the terms "cleantech" or "greentech". I completely understand why. As cleantech/greentech have become a major part of the ongoing political discourse, the clean and green terminology is starting to get laden with "let's save the planet" meanings.  Many VCs tend to have allergic reactions to such things.  Such returns-focused VCs (and also those who think energy independence is as important as green-ness) will want to use other terms to demonstrate that they're focused on their bottom lines, and not the triple bottom line (social, env'l, business).  They'll also want to demonstrate that they're not just being "me-too", and using different terminology helps to illustrate a different approach to the sector. What all this branding and counter-branding is really all about, of course, is that people do view the sector in very different ways.  For some, it's about renewable energy generation.  Others include energy efficiency, water, advanced materials, advanced manufacturing, etc.  I tend to fall into the camp of those who see a very broad investment thesis around looming natural resource scarcity, which then gets us into all of the above sub-categories and then some.  The problem is, "natural resource optimization" is just not very pithy. But what are we to turn to as an alternative?  "Resource tech" perhaps?  Someone smarter at branding than I am will have to come up with the next big catch-phrase. For me, it doesn't matter what we call it, as long as we're talking about productivity-maximizing strategies for addressing looming natural resource constraints in energy, water, agriculture, and other commodities.  And until someone comes up with something else that catches on, I'll continue to write the "Cleantech Investing" column on the "GreenTech Media" website. Deals from the past week (with a few firms looking pretty active):
  • Zigbee equipment provider Ember has raised an $8mm insider round of financing.  Investors included Polaris Venture Partners, GrandBanks Capital, RRE Ventures, Vulcan Capital, DFJ ePlanet Ventures, New Atlantic Ventures, WestLB Mellon Asset Management, Chevron Technology Ventures and Stata Venture Partners.
Other news and notes:  Here's an interesting interview with CMEA's Jim Watson...  Details on Ford's relatively quiet shift toward the electric drivetrain...  Finally: Enjoy. . . .

The funny thing about percentages

Rob Day: April 3, 2009, 11:19 AM
Both Eric Wesoff (of GTM) and the Cleantech Group released their Q1 cleantech venture numbers this week, and they were pretty close to each other in terms of total dollar amounts, with Wesoff tallying $836mm (but suggesting that undisclosed deals will take the number closer to $1B) and the Cleantech Group's total at $1B. But it's always very interesting to see how such numbers are interpreted.  With a column "Optimistic News in Greentech VC," Wesoff writes that the total -- which he pegs at "close to 2007 levels" and compares favorably to Q1 2008 totals, which he had counted at "more than a billion dollars" at the time -- is very healthy under the global economic circumstances, and a sign of strength in the sector. Meanwhile, the Cleantech Group's press release is very different in tone, talking about a 48% decline from the previous year's totals. This, of course, led to even more negative headlines in some press coverage. So wait a minute, how can this be?  Especially since, when I wrote about early Q1 2008 tallies a year ago, I mentioned the Cleantech Group's totals were at $1.25B, reasonably close to Wesoff's "more than a billion dollars"... Basically, it's another illustration of how good analysts using slightly different methodologies can arrive at very different results.  I checked with Brian Fan of the Cleantech Group, and he clarified that, after the initial Q1 2008 tallies had been released, then two additional and large Q1 deals were later disclosed:  A123, and Nanosolar.  Together, they ended up pushing the Cleantech Group's Q1 2008 tally up close to $2B.  Which then explains why a $1B Q1 2009 would be a 48% decline, naturally. I haven't confirmed with Wesoff, but my guess is that he also captured those two deals in his tallies, but put them into the Q2 2008 category.  It would make sense, too. So an arbitrary date in last year's calendar is the difference between the first quarter of this year looking surprisingly healthy, or looking really dire, once you start comparing year-on-year percentages.  But it doesn't matter, really.  The really important thing to note is simply that the dollars going into cleantech have declined somewhat, but haven't stopped by any means. A couple of other interesting notes:  Wesoff counts 14 out of his 59 deals as seed or early stage, which of course means yet another quarter when later-stage investments were the vast majority of deals done (or at least reported), in this case a 3:1 ratio of later-stage to seed/early stage. Furthermore, it's also interesting to note that deal sizes appear to be declining across all stages.  It's tough to prove this point, but when you look at the Cleantech Group's data point that the average deal size (a figure dominated by follow-ons, probably) has declined from $20mm to $12.3mm since Q3 2008, and also note this article describing how angel rounds across all sectors are still happening but at smaller sizes, it paints a picture of a lot of venture- and angel-backed companies making do with a lot less capital per round.  This may or may not also reflect lower valuations -- my guess is that it does, but I don't have any proof. And as always, there are differences in deal counts between two different tallies -- Wesoff at 59 deals, Cleantech Group at 82.  This can be explained in any number of ways, of course, and one thing to always note is the differences in geographic coverage between the two methodologies.  But interestingly, in terms of # of rounds, the Cleantech Group's North American tally (which appears to be something like 45 deals or so) is only slightly below their Q1 2008 count. So piecing it all together, this data appears to roughly confirm what I'd suggested might happen, back in December:  The mega-deals aren't happening now, and deal sizes are generally down, so the dollars are way down but the number of deals is only slightly down.  Cleantech is still a bright spot within the overall venture picture. Nice work again by both Wesoff and Fan.  Just always remember to look past the percentages, and especially past the headlines, and dig into the actual numbers. . . . .